What is the Exempt Market?
Generally speaking, the Exempt Market is a regulatory system that provides businesses with a more cost effective way to raise investor capital due to a reduced amount of oversight. The Exempt Market describes investments that are offered without a prospectus, most often by private companies that are not publically traded. A Prospectus is a very detailed legal disclosure document that is filed with Canadian provincial regulators and meant to be read by the investor. Firms raising money the traditional way using a prospectus offering can be listed on a Stock Exchange. Stock exchanges are a secondary market where investments can be bought and sold between investors.
Generally smaller and/or newer businesses, raise capital by offering investments through the Exempt Market. There are many variations, but these entities generally raise capital in the form of equity (ownership in the form of shares or stocks) or debt (liability in the form of bonds or debentures). The reduction in regulatory requirements in the Exempt Market does not come without some concessions for investors. Because Exempt Market investments are sold without a prospectus, they are generally ineligible to be listed on a stock exchange, and have limited access to secondary markets, meaning they cannot be sold for an extended period, if at all.
In Canada you can invest in the Exempt Market by meeting one of the various prospectus exemptions. Two of the most commonly used exemptions are the accredited investor exemption, used by those that meet high income and/or net worth standards or the minimum amount exemption used by those investors willing to put $150,000 or more into one investment. Many people also invest in the Exempt Market utilizing the friends, family, and business associates exemption based on having a relationship with a director or senior officer of the company in which they are investing. In Canada (except Ontario) everyday citizens can buy Exempt Market products via an Offering Memorandum (OM) Exemption. An OM contains similar information to a prospectus but is generally not reviewed by a regulator and is only filed with regulators after funds have been raised as opposed to a prospectus where filing occurs prior to any investments being made. One other key difference is that, while many businesses raising money this way do provide ongoing information about their operations and finances to investors, there is no legal requirement to do so.
Both the public stock exchanges and the Exempt Market have a primary market where they sell new issues or new investments. It is strongly recommended that you have a Registered Financial Advisor or other professional such as a Securities Lawyer have a look at any deal in depth before making an investment in the Exempt Market. In addition, when you consider investing your hard earned money into any type of product, Exempt Market or public, it is essential to follow diversification, asset allocation, and suitability principles tailored to your personal situation.
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